The Room For Manoeuvre: A New Category For The Understanding Of Property Investment Vehicles

The MM-Theorem and the neoclassical finance theory is still the mainstream within theory of finance. Within this universe finance does not matter. Several approaches coming form agency theory have included incentives to overcome problems connected with information asymmetry and moral hazard. Williamson has built up a theory of finance putting asset specifity in the centre of his argumentation, explaining the use of equity and debt in corporate finance. Hence, with this instruments we are not able to discriminate different investment vehicles like private equity, open ended funds, closed ended funds, and REITs. Neither neoclassical finance theory nor Williamsons approach can explain, e.g. why open ended funds have been more successful in Germany than property companies, which were tax transparent like REITs till the tax reform for corporation of the years 1999/2000. This paper includes a new dimension called the room for manoeuvre, developing a theory of financed based on the idea, investment vehicles, which can be seen as financial institutions, give a certain room for manoeuvre from the investor (principal) to the management (agent). The optimal room for manoeuvre depends on the necessary room each business needs. As capital costs depend on the room for manoeuvre for agency reasons, a big room for manoeuvre leads to high capital costs, e.g. the case of property companies, while a small room for manoeuvre leads to low capital costs, e.g. the case of open ended funds or Japanese REITs. Therefore there is depending on the business an optimal room for manoeuvre in the way, the principal chooses an investment vehicles which has the exact room necessary for the business. If the room is to high, there is a discount between the market capitalization of the liabilities of the investment vehicle to the net asset value of the assets financed through the vehicles. If the room is to small, the assets can not be treated in a proper way with the same consequence. This new approach has a number of applications within real estate finance, and is apt also to elaborate best practise for the construction of German REITs.